Managerial Overoptimism in Strategy Formulation: An Associative Explanation

Abstract

This chapter explores the phenomenon of managerial overoptimism, focusing on the cognitive underpinnings of the mechanisms that generate this bias. It develops a formal model of probability estimation that is inspired by the biological (cognitive neuroscience) evidence on associative information processing in the brain. The model is able to make novel, testable predictions about managerial overoptimism. It is able to parse out three mechanisms that could lead to overoptimism, as well as predict boundary conditions on when these effects should be observed and when the opposite (a pessimistic bias) should be observed instead. Furthermore, it predicts that under certain conditions, attempts by managers to “debias” their estimates might exacerbate the overoptimistic bias.

Citation

Menon, A. (2015), "Managerial Overoptimism in Strategy Formulation: An Associative Explanation", Cognition and Strategy (Advances in Strategic Management, Vol. 32), Emerald Group Publishing Limited, Leeds, pp. 327-350. https://doi.org/10.1108/S0742-332220150000032011